Green Plains Inc (GPRE) 2009 Q3 法說會逐字稿

Greetings and welcome to the Green Plains Renewable Energy, Inc., third quarter 2009 financial results conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jim Stark, Vice President, Investor Relations for Green Plains Renewable Energy. Thank you Mr. Stark. You may begin.

Good morning, and welcome to our third-quarter earnings call today. Todd Becker, Director, President and CEO; and Jerry Peters, our Chief Financial Officer, are on the call today.

We are here to discuss our third-quarter 2009 financial results and the near-term outlook for Green Plains. Please remember that a number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Green Plains' management, and there can be no assurance that such expectations to prove to be correct.

Because forward-looking statements involve risks and uncertainties, Green Plains' actual results could differ materially from management's expectations. Information about factors that could cause such differences can be found in yesterday's earnings press release on page two and in our 10-KT and other SEC filings.

The information presented today is time sensitive and is accurate only at this time. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Green Plains will not be reviewing or updating this material.

Now I would like to turn the call over to Todd Becker, our Chief Executive Officer.

Thanks Jim, and good morning everybody and thanks for joining us today. In addition we have Steve Bleyl on the call with us, who is our Executive Vice President of Ethanol Marketing, who will be available to answer any questions after the presentation on ethanol marketing overall.

We hope you have had a chance to review our quarterly earnings issued yesterday after the market closed. Before we get started and for our first-time listeners, Green Plains is a vertically integrated ethanol producer based in Omaha, Nebraska. We currently have six ethanol production facilities throughout the Midwest with an annual operating capacity of 480 million gallons per year.

We also operate an independent third-party ethanol marketing business which markets all of the ethanol we produce along with 360 million gallons from four other producers in the Midwest, bringing our total ethanol marketed to 840 million gallons annually, or about 8% of the US ethanol produced in the US today.

We have a majority interest in a biofuels blending terminal operator, Blendstar, LLC, based in Houston, Texas.

We also operate a full-service agribusiness segment providing agronomy services, grain storage, seed fertilizer, and petroleum products to 1800 farmers in Iowa and Minnesota. We also have a 25% interest in BioProcessAlgae, LLC, which is on the forefront of developing technology for capturing carbon dioxide to grow and harvest algae, which can be used as a feedstock for biofuels, high-protein feed for livestock, and a biomass energy source.

Briefly, our consolidated revenues for the third quarter were $362 million. We reported net income of $5.5 million or $0.22 per share.

I'm pleased with our financial performance in the third quarter, particularly with our ethanol production segment. We were able to run at capacity in the quarter and start up two plants acquired in July, bringing them into full production in the quarter. We produced at 100% of operating capacity in September, and barring any unforeseen challenges, we are on track to produce and ship 120 million gallons in the upcoming fourth quarter.

Our company operating income before corporate expenses was $13.6 million for the combined three segments in the third quarter. That was a $6.3 million improvement compared to the second quarter of 2009.

We experienced continued improvement in ethanol margins during the third quarter of 2009. Our ethanol production segment generated most of the operating income this quarter. This quarter we produced and sold 107 million gallons of ethanol from company-owned plants. The ethanol production segment generated $13.5 million in operating income.

Our agribusiness segment turned in a small operating loss of $1.1 million for the third quarter. A reminder to everyone is that the agribusiness segment has a distinct seasonal pattern of strong second and fourth quarter periods, with the first and third quarter of the year's being weaker. We expect that during the upcoming fourth quarter, the agribusiness segment will again contribute to the overall results of the company.

Our marketing and distribution segment contributed an operating income of $1.2 million for the third quarter. At the beginning of October we announced we have expanded our marketing and distribution platform by adding a fourth plant with an annual operating capacity of 55 million gallons, bringing our marketing and distribution business under contract to 360 million gallons on an annual basis.

We anticipate opening our seventh Blendstar distribution terminal in Collins, Mississippi by the end of November. This opening will bring us to operating in six states in the South and Southeast sections of the United States with approximately 400 million gallons of biofuels throughput on an annual basis.

In addition we have several other Blendstar locations in various stages of development as well.

My last comment on our financials is that our corporate overhead expense totaled $2.9 million in the third quarter, or $0.027 per gallon sold. Keeping our costs down and being a low-cost producer for ethanol remains a focus of our company moving forward.

The environment in the ethanol industry has significantly improved over the last 90 days. The industry is again on solid footing. Supply and demand have reached a point where oversupply is not a pressing issue, and in fact, we continue to open up new markets for our products both domestically and globally.

We are optimistic, as ethanol has become a permanent part of the fuel supply and has reduced our dependence on foreign oil. We must continue to drive more widespread use of our great product, which is clean burning and energy efficient.

Margins have increased on a steady basis. More plants are back operating. Oil companies continue to invest in ethanol assets, and demand for ethanol is more robust today than any time earlier in the year. We were successful in increasing our ethanol production platform by 45% in July with the acquisition and startup of two plants in Nebraska. As discussed in our press release yesterday, we operated our plants at capacity in September.

In addition we have locked in forward margins on 78 million gallons as of September 30. Since the end of the quarter, we continued to lock away forward production in an improving margin environment, and with the expansion of our production to 120 million gallons, we also expect to generate better results in the fourth quarter in the ethanol segment.

One thing to always remember is that we never look at one commodity price in a vacuum. If you just focus on the price of one component, you will miss the whole picture of the current situation. We lock margins away.

In summary, ethanol margins are better, production at Green Plains should continue at full capacity, the agribusiness should have a strong harvest quarter result. This all adds up to an expected strong fourth quarter and a nice way to finish a challenging year.

Now I would like to turn the call over to Jerry to review the second quarter financials in more detail.

Thanks Todd, and good morning everybody.

For the third quarter 2009 we continue to compare our results on a sequential basis, as we have done in the previous two quarters of this year. Prior to the fourth quarter of 2008 we had no significant operating history to compare to as a result of the VBV merger completed in October of 2008.

We reported revenues of $362 million for the third quarter of 2009. That's a 27% increase over the second quarter 2009 revenues of $285 million.

For the first -- for the full nine-month period of 2009, revenues totaled $868 million.

Consolidated gross profit was $21.4 million for the third quarter, which is a $6.5 million or a 44% improvement over the second quarter of 2009. Increase is attributable to margin improvements and additional volumes in the ethanol production segment.

Total operating expenses were $10.6 million in the third quarter compared to $10.7 million for the second quarter of 2009. With a 39% increase in ethanol volumes quarter-over-quarter and flat operating expenses, we believe this illustrates the scalability and operating leverage of our production platform. Although the agribusiness segment will typically have some seasonality to their expense levels, we believe this is basically the run rate for operating expenses we can expect going forward.

Looking more specifically our business segments, for the third quarter we reported revenue in ethanol production segment of $206 million. That was an increase of more than 35% over the previous quarter.

As I said a moment ago, ethanol volumes in this segment increased 39% over last quarter to 107 million gallons. The main driver for this increase was the addition of the two Nebraska ethanol plants which we acquired in July.

Our agribusiness segment generated $44.6 million of revenue for the quarter compared to $58.8 million for the previous quarter. This decline was expected, as Todd indicated in his comments earlier on the call, due to the seasonality of the agribusiness segment. We do anticipate a strong fourth-quarter performance from the segment to close out 2009. Although fall harvest has been delayed somewhat in our service territory, activity has really picked up in the last week or so.

Marketing and distribution segment revenues were $318 million for the third quarter 2009 compared to $231 million for the June 2009 quarter, representing an increase of nearly $87 million. This increase is the result of more gallons marketed for third-party producers and the company's increased ethanol production for the third quarter of 2009.

The segment sold 162.2 million gallons of ethanol during the third quarter compared to 120.2 million gallons in the second quarter.

Total segment operating income or total operating income before corporate selling, general and administrative expenses, was $13.6 million in the third quarter compared to $7.3 million in the second quarter this year. On a year-to-date basis segment operating income was $16.2 million.

In summary, we are pleased with the quarter's results, with our net income for the third quarter of $5.5 million or $0.22 per share on a diluted basis compared to $627,000 or $0.03 per share in the second quarter.

During the quarter our earnings before interest, income taxes, depreciation and amortization, or EBITDA, was $19.3 million, which was an $8.1 million improvement over the second quarter of 2009. EBITDA on a year-to-date basis was nearly $30 million.

As a reminder, EBITDA is a non-GAAP financial measure, and I'd like to direct your attention to information included in the news release, including a reconciliation to our GAAP net income.

Our liquidity position is strong with $69.1 million of cash on the balance sheet and $43.5 million available under committed loan agreements, bringing our total available liquidity to nearly $113 million at the end of the quarter.

Our balance sheet continues to gain in strength. We completed the acquisition of the two Nebraska plants, which did add approximately $130 million in debt but also added considerable expected cash flow from these assets. With the favorable financing we achieved on these facilities, we saw a strong quarter of cash flow contribution from these two new plants. Remember, this occurred during their startup. Needless to say, we are very pleased with this acquisition.

As a result of the acquisition, we had approximately $457 million in debt on our balance sheet at quarter end.

Our total debt service for the coming 12 months is estimated at approximately $51.3 million. Just to put that in context, that's about $0.107 per gallon against our 480 million gallons of expected production over the coming year. We are comfortable with that level of debt and expect to make solid progress reducing it from our strong cash flow.

Finally, I want to mention we ended the quarter with book value of our stockholders' equity at just over $285 million or about $11.10 per share.

Now I'd like to turn the call back over to Todd for his closing comments.

We had a successful launch of our BioProcessAlgae Grower Harvester pilot project last month at our Shenandoah ethanol facilities. The technology is deployed, and we are looking to efficiently and effectively grow and harvest algae in a commercial environment. Our primary focus is to sequester the CO2 that is being emitted from the ethanol production process.

The warm water and the waste heap from the plant all provide perfect inputs that help the algae grow. The reactors that are deployed at the plant are directly linked to the carbon dioxide stream, and we believe this is one of the first times this has happened in the United States. When algae is harvested it can be used to produce advanced biofuels, high-quality animal feed, or be used as a biomass to create energy to help power our plants.

Today our ethanol plants produce one of the cleanest burning fuels available, and if this technology proves successful, we will also do it in one of the cleanest production processes for any motor fuel.

While an ethanol plant is considered to be at worst carbon neutral, this process has the potential to take our plants to a carbon negative situation. We are quickly moving into phase 2 of the pilot project and plan to once again increase the size and scale of the Grower Harvester systems. This evolution will hopefully lead us to a path to a commercial scale project that can be rolled out and used in several different applications, from an ethanol plant to a coal-fired power plant to any industrial process that emits CO2 and is looking for a solution.

We will keep everyone updated with the progress we make in the next stage of the pilot project.

Our plants are producing at or near capacity. We firmly believe that the industry downturn is behind us and that the industry is in a solid position as we approach 2010. The ramping up of the RFS mandate for 2010 to 12 billion gallons is upon us, and when you add the potential record foreign crop being harvested this year, it creates favorable economics for ethanol for the upcoming year.

Margin management remains a top priority. We are not changing our strategy away from locking away forward margins just because the spot margin looks better today than it did yesterday. We have also started to see opportunities for 2010 to sell ethanol to the market and have started to lock in margins for Q1 2010 and beyond. When opportunities present themselves, we move quickly to get coverage for our production. While we always have forward positions on, we naturally leave a certain proportion of our production for the spot market, and the cost benefit of that is part of our overall risk modeling. While our plants have been running well, we must ensure that we are not oversold if one or more of them encounters production problems.

We have accomplished a lot in a short period of time, and we are not done. I firmly believe we can continue to grow our business platform as effectively and efficiently as we have over the last year and a half. We continually look for opportunities to grow our business, which includes possibly adding to our agribusiness segment, ethanol production, or marketing and distribution segment. Our formula continues to prove itself over and over again. We are building a vertically integrated value chain with multiple income streams that complement each other while continually lowering our cost of production.

I'd like to thank everyone for calling in today. Now I would like to ask Claudia to start the question and answer session.

(Operator Instructions). Matt Farwell, Imperial Capital.

Congratulations on a successful quarter. I want to focus right now on the marketing and distribution revenues. The way I calculate it, you had 162 million total ethanol sold and 170 million of internal production. And that seems lower than the annual number of 360, which you mentioned earlier in the call. At what point in the year are we going to see the full 840 million gallons per year of ethanol sold?

We produced 107 million gallons of ethanol for the quarter internally. And then we are ramping ourselves up to 120 million gallons, and then if we take that times four, obviously that will get us to 480, and so we are actually operating today at a full run rate on the production segment.

In addition we are starting -- we added a plant in the -- in last quarter -- or October 1, actually, to take us up to 360 million gallons, as well as some of the plants' down time that we market for as well. So we think in the next 12 months is really when we are going to see the full 840 million gallons as all of our plants that we have -- own -- are operating, and then the plants that we market for are operating as well.

Okay. And I'm looking at your ethanol realization of $1.59, which was in line with what we saw in the CBOT futures during the quarter. But it's higher than I would've expected given the basis that we should've seen for transportation costs. Could you provide some color on how this metric outperformed?

Well actually I think the average price is a little bit higher on CBOT for the quarter. What we do is, when you kind of -- we don't ever look at a price in a vacuum. We just lock margins away. So when we see opportunities at $1.50 or $1.70, we just continue to lock (multiple speakers) it just basically turned out that the average was $1.59 against a corn price of -- let me look here real -- (multiple speakers) of $3.75, which particularly achieved our margins of about $20 million of EBITDA.

So in general I don't think you can ever really view us as an average seller of anything. I think the key is that our -- that's why these prices are really not realistic relative -- to look just in a vacuum. We lock margins away, Matt. And I think just to focus on us versus CBOT but is not the way to look at this. We have to just look at how our margins are relative to what the actual [cost] margin is for the quarter on a daily basis.

Okay. Now, I'm looking at the variance of distillers grains sales from what I was expecting. I see ethanol volumes increased 38% but still distillers grains only about 34%. So going forward, we should have ethanol ramp about 12% to get to 480 million gallons per year annual run rate. Should we expect a commensurate 12% increase in distillers grain?

Yes. I would assume that that would be the case. I think one thing we have to remember is that as well, we oftentimes will look at the end of the quarter and what is in transit. Sometimes at the end of a quarter when something is in transit, which we don't break out, we'd have to take them out of the earnings for a certain quarter from a revenue standpoint. And so it may have happened that at the end of the quarter we had some distillers grains in transit that we actually had to remove from this quarter's revenues, as well as the profits would get removed as well. But in general I would say that you should see a like for like increase in our production -- ethanol production of what you say, of about 10%, 12%, and then you would see the increase in DDG production as well, as we ramp up.

Jerry, do you have any comments on that?

The only thing I would add to that is, we also report all of our distillers grains on a dried equivalent basis. So in that conversion of the wet distillers grains or the modified wet, there may be some impact of that conversion that it would have that would create some of that distortion.

Yes. If you take a look at our plants and how they operate, we'd have -- the one plant in Nebraska ships just about everything modified. So there the conversion would be a little bit different. And then our Shenandoah plant as well ships a large portion of their product in a modified manner, with the rest of our plants mainly shipping dry. So sometimes that may skew that number a little bit.

My last question is regarding the agribusiness segment. Could you provide some more color on what metrics will improve in that segment, given that fourth quarter is going to be an important quarter? And also what would a strong margin look like in that business?

In terms of the metrics, what happens, as typically happens in the third quarter in a business like that, is there's basically no handle revenue and no fertilizer and chemical revenues. You get revenues but no margins, because basically you've just cleared out your storage getting ready for harvest, and so there's not really a lot of handle margin that's left to take. Most of it was taken either in the first, second -- or the fourth quarter of last year and the second quarter of this year.

On the go-forward basis, I think you can look at -- it should be a good quarter from a standpoint of the crop is wet, so this will be another year that we are going to have very good drying revenue, which again, we don't break out. We'll just give you indications of that in addition with the size of the crop and the location of those assets.

Within 100 miles of those assets there's over 1 billion bushels of corn grown. So we should have a good handle quarter once they get the crop out of the field, and we are having a very good start to the drying quarter as well. In addition we are also starting to see very good applications of fall fertilizer once they're getting out of the field and as well as starting to get some stuff getting ready for winter.

So in general, if you kind of take a look at the fourth quarter of last year, and you'll see that, that was broken out separately, you'll be able to kind of get a feel for what we are expecting for this quarter. The only thing I would caution you on is that harvest is late this year, and last year it was very early. So some of that might get pushed into first quarter of 2010. But in general I think you can look at last year's fourth quarter and get an understanding of what this quarter should again look like, not barring any continued challenges in getting the crop out of the field.

Jerry, do you want to comment on that?

No. I think that's right. We had a good fourth quarter, and that probably is indicative of what we can expect going forward for this coming fourth quarter.

Well thanks, and congratulations again.

Ian Horowitz, Rafferty Capital Markets.

Congratulations. Just a little bit of clarity. Todd, I think you mentioned overall the fourth quarter is going to be better than -- going to be a continuation of positive trends. That is the sequential continuation of positive trends? And is that going to be both top line as well as bottom? And also throughout -- we just said that the ethanol business and the agribusiness should do well, so I assume that's also true. It's through the entire business line; is this true?

Yes, I think that is true. If we take a look at a couple of metrics, we are going to produce more, as was mentioned on the last question, so we're going to go from 107 million to 120 million gallons of production. And so we're going to increase our production in an expanding margin environment.

In addition, when you add on the fact that we'll have the agribusiness quarter again -- or the agribusiness segment again to start to contribute, I think you take a look at all those things and you start to move to a higher top line and a better bottom line for what we've seen from the third quarter to the fourth quarter. And we are -- as well as what we've been able to lock in thus far. As we mentioned we had at the end of the quarter close to 79 million gallons of production locked in on the forward market. We've continued to do that where at this point most of our quarter is basically locked away, and we still have some ethanol that we are selling, but in general we have a very good feeling for the quarter. And I would tell you that the margins had improved again from third quarter to fourth quarter as they had done from the second quarter to the third quarter.

Great. And there is -- if you look at the industry data services, there is a significant amount of capacity that sits idle, not to mention the several large plants from some of your larger competitors that will go online within the next call it six to 18 months. Do we get -- are you concerned that we get back into an imbalance again? If you put the plants back online that are idle, we definitely can build past the RFS levels.

I'll answer that first, and then I'll let Steve Bleyl comment.

Basically what we see is that supply and demand again has come -- is starting to come back into balance. We are probably not producing at a 12 billion -- or we are not producing at a 12 billion gallon rate. I think if you look at the ethanol industry in general, historically we haven't operated at capacity. In fact in average we've been operating around 85%, 90% of capacity, even when plants are running. That's the first point.

The second point is that I think we will see some of these plants come back online. I still think there will be some of the marginal production that won't because the forward curve is not again telling you to come back online yet, but the [nearby] market is. And I think in general, besides the RFS increasing to 12 billion, we are seeing some export demand, imports are down, the Brazilians are not very active today. And I'll let Steve just kind of finish up with those kind of comments on the general market.

But I think in general I don't anticipate we're going to move to a very big oversupply position because of the way the industry runs, the good demand for the products, blending margins are very good, and we seem to have a little bit of exports going on.

Ian, it's a good question. We do see some incremental production coming back online and newer plants with projects the they've had. But I think we see the offsetting demand, as Todd mentioned, with the RFS increase for 2010. You've got some incremental increase in California. You've got incremental blending based on blend economics for the Southeast, which we are seeing new markets coming online, and then as Todd also mentioned, the export/import balance probably in our favor as production.

So with those four areas we do see an offsetting demand increase against the new production coming online, Q4 going into Q1 of next year.

Okay. Great, thanks guys.

(Operator Instructions). Paul Resnik, Olympia Asset Management.

I didn't think I was going to make it. I was at a meeting and I just caught part of the presentation. But you do refer to export business and to Brazil. Where is your export business? And is it ethanol? And distillers grain? And what's the prospect for this? And of (multiple speakers)

We don't -- we are a domestic production company. What we would do is that when somebody wants to buy our production, we have the capability at one or more of our plants to make export specs. But today we are not exporting ethanol. But there is some understanding in the market that that is going on. And in addition some of our distillers grains end up in the export channels. But again, we are not a direct exporter of anything today out of the United States.

But I think the point is that, again, it's another demand source. Brazil exports are down. With the sugar situation down there, what we are seeing is that a lot of those -- that demand is starting to look at the United States. We are not really clear whether there is anything actually exported to Brazil out of the United States. There's been a lot of rumors of that, but again, there is no clarification of that.

But in general I think what it's doing is it just kind of lines up to say that supply and demand is that it will be at an equilibrium, and it will be some other sticking points whether it comes from export or lack of imports and then the way the production runs in the United States that I think that this situation will continue to stay in the ethanol margins for a little while longer here.

Thank you.

Brett Conrad, Longboard Capital Advisors.

Great quarter, by the way. Thank you.

Quick question on the algae side of your business. What's the endgame in that in terms of margin and what you think ultimately the off-take will have to be per gallon on that business to make money?

Basically the way that we have set the business up, our endgame might be a little bit different than what others are out there. We are basically right now scaling up a Grower Harvester system. If you think about a production process, we are going to act almost as the farmer acts in agriculture. We're going to produce and sell the algae to multiple streams, whether that would be somebody that's working on the mass biofuels, whether that's somebody that needs to use it in a high-quality animal feed, or whether we can dry it and actually take the biomass and burn it as energy.

If there is -- for us, how we look at the business is that there's kind of two phases here. One is the technology side of it, and one could possibly be a project development side of it. What we are going to do is hopefully ramp this up to commercial scale to provide people with a solution that they can capture their CO2 and grow a high-value downstream input. And that's basically our strategy.

It's still a very early stage, we are moving from a stage one pilot, which is now working in Shenandoah and has been rolled out in the month of October. We are going to hopefully in the first quarter get a stage two pilot, which would be a much larger scale of what we have in Shenandoah, that's going to be moving outside of the plant and in its own enclosed structure. And then from there we will move quickly to look at the possibility of commercialization to -- our first goal is to sequester all the CO2 from Shenandoah and grow algae at our ethanol plant in Shenandoah and then take that scale and move it to other applications.

So the endgame is still a long way away, but I think what we have today is we have invested in one of the leading technologies out there on growing and harvesting and in one of the only processes that are going on today that is actually sequestering CO2 from an industrial plant, we think, in the United States and maybe beyond.

Great, thank you. I think it's a good -- personally I think it's a good use of the carbon and the heat from the plants, so --

Yes. Thanks for calling.

(Operator Instructions). Andrew Huang, Broadpoint Capital.

Nice quarter. I just was wondering if you guys could comment on any further opportunities or acquisitions you see in ethanol plants out there right now, and would you guys be interested? Secondly, I was curious if you could give any general color on valuations you're seeing out there for plants that are for sale. I presume there are still quite a few plants up for sale. I don't know if you can give that color on sort of a per gallon basis or not, but that would be helpful.

Well, let's talk a little bit about Green Plains first. We are actively looking to expand our platform in all three segments. We are looking to potentially buy more grain elevators in agribusiness, operations where we would do fertilizer chemical seed. We are actively looking at opportunities there.

Downstream, we are starting -- we continue to expand Blendstar. They're opening up their seventh terminal. We have several other terminals under development.

And in Steve's segment, where we doing ethanol marketing, we are actively looking to do -- to market other ethanol for other plants.

When we get to the ethanol segment, for us it's all about the right technology in the right location at the right price. And obviously what we've seen is we had opportunities to get the couple of assets in Nebraska, but if you look back, that was in a much different environment, margins were much tighter, and actually the industry really didn't know where the direction (technical difficulty) of that was going to go at the time. So when we bought those, obviously valuations were much different.

Do I think we could repeat those plants in a location like that with the technology of ICM. I don't believe today that we could repeat that in the market today. There are still a lot of plants for sale, but again, it's going to come down to, where do you want to buy it? And what technology do you want? We've got five ICM plants and one Delta T plant, and so we see the operational data in terms of the cost of production, and we are very focused solely on ICM today, and in the right location, which for us would be middle of the country, Nebraska, Iowa, Minnesota, Illinois, Indiana, and in that region, probably wouldn't look at any plants in the outlying marginal production like Texas, Kansas, California, Colorado, Oregon and Washington -- probably doesn't interest our platform very well because we are really focused on more of the origin plant model.

And again, the valuations -- we haven't seen anything for what we would be looking for. We haven't seen any new valuations, but I will tell you that I don't think we can repeat the transaction that we completed, because obviously margins are better, times are a little bit better, there isn't -- I think the industry is getting healthier, I think their balance sheets are getting stronger, I think they're generating free cash flow today, and overall I think to repeat anything like we have in the past -- and we are very picky and choosy on what we want to buy. I think in order to repeat that today would be almost impossible. So I would say in general valuations are higher, if not much higher from that point.

Great. I appreciate that. Thank you. Lastly, any color or information or updates on the legislation activity with the move from 10% to 15% of ethanol per gallon? I think it was December we are waiting for something with Congress. Is that still the case? Are you guys close with that?

Yes. Basically we are hoping that we will get some kind of ruling in early December. They are talking that it may get pushed back now, but we're not -- we have no confirmation of that.

We are asking for the waiver, we are not asking for a mandate. Allow people to blend higher blends if it is, number one, profitable to do so and if they desire to do so and if the demand is there. I think the science is -- it backs up the fact that we can blend higher rates of ethanol without causing any damage to an automobile.

We have several blender pumps that we operate through our agribusiness segment as well, and we are seeing a good [attraction] to those pumps as well.

I think overall though we are optimistic that we are going to get a positive ruling, but I think today we are really just not sure what's going to come out or if it's going to get delayed.

The 15% is what we've asked for through Growth Energy. There are people that are talking that it might come in a little bit lower and ramp up to 15%. Again, I don't think today we have a very good, clear understanding of what the decision will be and whether it will be December 1 or not, but we are hoping it will.

Thank you very much, best of luck to you guys next year.

Joe [Lambreck], RBC Capital Markets.

I wanted to have you comment on corn costs. Throughout the quarter corn moved on the CBOT from $3 to $4 a bushel. You generally buy below those costs. The harvest is late this year, generally speaking. He did reduce your average cost from about $4.00 to $3.75 a bushel. Can you comment on how the quarter went for acquisition and considering the late harvest?

The third quarter is what we can comment on today in terms of price. Obviously that was a while ago. I would say, though, that we -- four of our plants buy under CBOT, and two of our plants actually have a [basis oversee buy] because they're on the East Coast and they are in Indiana and Tennessee. Again, if you look at that, the ethanol is about the same. Basically ethanol in Iowa and Nebraska trade under the Chicago ethanol market, and Indiana and Tennessee typically trade over the Chicago market.

In general again (technical difficulty) look at price in a vacuum. We look at a price, $3.75 corn against $1.60 ethanol and what margin does that provide us. And it provided us a margin that was acceptable where we could drive net income to the bottom line, and I think that's how we look at it.

So again, it would be hard for us to ever comment on price in a vacuum because we don't ever look at a single price component of anything that we do and say it's the right price or the wrong price. We just lock margins away.

So I think -- and again, going forward, I think you'll see the same thing. That's why we are trying to get away from just looking at a single price component to say that we -- that it was a good or a bad quarter in terms of what we bought or what we sold. We are moving more towards just saying that it was a -- from a margin standpoint we were able to lock EBITDA. We focus on everything and we've said that many times in all of our presentations -- and I really want to stress it here -- we really focus on EBITDA per gallon. That's our whole -- all of our models are based on that.

As Jerry mentioned, it's $0.11 a gallon EBITDA to service our debt. And anything above that will start to drive bottom-line net income and free cash flow. And that's how we focus every day, so if you look at the quarter, we produced 107 million gallons of production at around $20 million of EBITDA for the ethanol production segment -- more than enough to service our debt for the quarter and to drive income to the bottom line. We are enthusiastic that margins have expanded and in some places considerably expanded since the end of the quarter and since we locked those margins in.

So I am not eluding your question, but again, it's hard for us to comment specifically on an individual price.

Can I ask a follow-up?

Sure.

Then let me ask about margin specifically then. Competitors are looking at 25, 26 per gallon range. At what point do you guys feel [is a] satisfactory margin to lock up a gallon of future production versus handling it on the spot market? And what is your philosophy of locking it up versus taking it on the spot? Of course you can't over commit because if it's a contract, if you can't deliver in case there's a problem, so can you -- do you lock up half of your production? Three quarters of it? And at what cents per gallon margin is good?

I'll comment a little bit on that. What I can say is that in an expanding margin environment, we may lag a little bit because we're going to wait -- we might be a quarter behind because we've locked in a lot of the -- typically we are very front-end weighted on locking margins away. But we will catch up very quickly. And in a contracting margin environment our model will outperform for several quarters because we locked in forward margins as well.

What we look at is we are basically margin agnostic. We don't say that $0.25 is right or $0.35 is right, because we have so much to sell on a daily basis. We produce around 1.4 million gallons or more a day. Because we have so much to sell on a daily basis, we actually don't -- I would say we are margin agnostic. If it's $0.20, we will sell it that day, and if it's $0.40, we will sell it the next day -- and every day we need to lock production away. We know what it takes to service our debt, and we know what it takes to generate free cash flow, and if we could have a large portion of say the next six months locked away at the number that generates free cash flow, pays our debt and makes us stronger on the balance sheet getting us ready for --

Commodity markets are cyclical. They will always be cyclical. I think what we're -- we have a cyclical upturn in the ethanol market, but we've a -- we gone -- just gone through a very bad cyclical downturn in the ethanol market, and I think the one thing we need to be very careful of is, nothing lasts forever and when opportunities present themselves on a daily basis, we are going to lock margins in.

So from a standpoint of answering your question, I'll just repeat again, we are basically margin agnostic. We will lock margins in every day, whatever they are. It may reach a point where at $0.11 a gallon we may just say, well, hold on a second, we don't believe that you can operate much below a breakeven debt service for very long. And I think the industry has proven it so.

I think the one thing that happened is that the industry didn't get in trouble because margins went negative for a long time. The industry got in trouble for looking at price in a vacuum and got long corn. I think the industry is much smarter today, starting to get better capitalized, and looking at margins instead of just looking at price of one component. And so I think whenever the opportunity presents themselves they move -- the industry is starting to lock margins away. I think that's very healthy for us.

Thanks.

Thank you very much for calling.

There are no further questions at this time. I'd like to turn the floor back over to Todd Becker for any closing comments.

Thank you everybody for calling in today. We are optimistic about the future of our company. We've come through significant growth over the last 18 months in a challenging environment, and I think, again, as I can stress, our model continues to prove itself over and over again. We are building a vertically integrated value chain with multiple income streams that complement each other, as you can see, while we continually lower our cost of production. With the acquisition of the Nebraska plant, I think we have one of the lowest costs of production in the industry today. We will continue to focus on that and try to drive efficiencies through all of our plants on a daily basis. And again, part of succeeding in a commodity business is being a low-cost provider with our low-cost corporate costs under $0.03 a gallon, and we continue to focus on that.

We are optimistic about the next quarter and the next 12 months, and hopefully you will continue to follow our story. I think it's very exciting times again in our industry, but again, we want to be cautiously optimistic that -- because things can change rather quickly, but at this point we are focused on continuing to grow our company, grow our earnings, grow our balance sheet, and provide a very good company for you to invest in.

I'd like to thank everybody for calling in today. Have a nice day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation.